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At Tata's Engineering Research Center, near the bucolic surroundings of the Tata Motors factory in Pune, India, there are two cars on display. One is a complete prototype of the Nano, the $2,500 compact car Tata unveiled in January, which has all the essentials and safety features of India's higher-priced automobiles along with a sticker price that will forever change the economics of low-cost cars. The other is a neat bisection, with the car's innards clearly visible. "Every day we invite people to come and examine the car and ask: 'How can we make more savings?'" says Tata Motors Chief Executive Ravi Kant.

That quest to build the world's cheapest car hasn't ended. The Nano should be available this fall, but the mission began back in 2003, when Ratan Tata, chairman of Tata Motors and the $50 billion Tata conglomerate, set a challenge to build a "people's car." Tata gave an engineering team, led by 32-year-old star engineer Girish Wagh, three requirements for the new vehicle: It should be low-cost, adhere to regulatory requirements, and achieve performance targets such as fuel efficiency and acceleration capacity. The design team initially came up with a vehicle which had bars instead of doors and plastic flaps to keep out the monsoon rains. It was closer to a quadricycle than a car, and the first prototype, Wagh admits candidly, "lacked punch." Even a bigger engine, which boosted the power by nearly 20%, was still dismal. "It was an embarrassment," says Wagh.

But the failure was also the catalyst for Tata's decision to build a proper car, not an upgraded scooter on four wheels or anything flimsy or cheap-looking. "We didn't want an apology for a car," says Ravi Kant. "We were conscious of the fact that whether it was a $2,500 car or not, it ought not to have looked like a $2,500 car."

The tale of the creation and design of the Nano is one of innovation and ingenuity, both inside and outside Tata's own organization. First, Ratan Tata called a meeting of his top parts suppliers and, after showing them the early, earnest but flawed prototypes, asked them to help. Companies including Germany's Bosch, which makes the computer that is the heart of car's engine, were skeptical. So were local Indian players.

But Tata persisted, pointing out that not only could a company's specific developments for the Nano help to make history but they could also improve their companies' businesses and bottom lines. Soon most of Tata's traditional suppliers were on board. Rane Group, for instance, makes a rack and pinion steering system. It focused on reducing the weight of the materials used, replacing the steel rod of the steering with a steel tube—a major cost-reducer. Typically, the product is made of two pieces, but it was redesigned as one to save on machining and assembling costs. According to Harish Lakshman, director of the $317 million company: "The world has seen this sort of integration of two pieces into one, but applied differently — not for a new car, and not to reduce costs."

GKN Driveline India, a subsidiary of global auto parts leader GKN, made the driveshaft — the component that transfers power from the engine to the wheel. The team spent a year developing 32 experimental variants to create the perfect driveshaft for the Nano. It roped in designers from the company's French and Italian operations and changed the design to make it lighter and easier to manufacture. For the Nano's rear-wheel drive system, GKN designed a smaller diameter of shaft, which made it lighter and saved on material costs. "We thought if we were successful in this, we could dictate terms to the market, and every other car manufacturer would want to work with us," says Rajendra Ojha, chief executive of GKN Driveline India.

Taking the pulse of the project
All the suppliers have similar stories. And although none would disclose specific cost savings, most stuck to Tata's mandate to cut costs. That was, as Kant acknowledges, the biggest hurdle for the company — "then, now, and in the future," — particularly as the price of raw materials like steel have more than doubled in the past four years, and the company has to follow new, tighter industry regulations. Kant, who recently led negotiations to acquire luxury auto brand Jaguar Land Rover, has little time to get involved in day-to-day details of Tata's many projects. However, with the Nano, "every cost, every component price, has to be run by me," he says.

Coordinating the vendors with Tata Motors' team was a whole new exercise in logistics. Wagh quickly realized it was necessary to bring everyone on board, "else it leads to last-minute heartache and delays." Every morning, he would spend an hour or two on the floor of the Pune factory, insisting that everyone involved — designers, manufacturing teams, vendor development people — be there to accelerate decision-making and problem-solving. "We had to have the pulse of the project and know exactly where the hurdles were," Wagh remembers.

Over time, Wagh's team grew to comprise some 500 engineers, an impractically large group to gather on a daily basis. So instead, a core team of five engineers gathered every day at 3 p.m. to discuss the latest developments. Each engineer represented a different part of the car: engine and transmission, body, vehicle integration, safety and regulation, and industrial design.

Fitting the parts of the car together required lots of little, head-breaking details, recalls Wagh. The engine, for instance, was designed three times. Initially, Wagh thought they'd buy an off-the-shelf engine and so studied all the small-capacity engines available. They were unsuitable, so in early 2005, he decided to build his own. The first was a 540 cubic-centimenter engine that, when fitted on the prototype, lacked the necessary power. So its capacity was increased by 9%, then by another 9%, before Wagh finally settled on a 623 cc engine. Then the foot pedal had to be realigned to create more legroom.

The body had to be changed because Ratan Tata, over six feet tall himself, wanted it to be easy for tall people to get in and out of the car. "Imagine the plight of the body designer—he went through hundreds of iterations, then at the last minute the car length was increased by 100 millimeters!" Wagh says. The attention to detail paid off: When the car rolled onto the dais at the Auto Show in New Delhi in January, and Ratan Tata stepped out of the driver's seat with ease, it made an immediate impact.

What shook the automobile world most was the fact that the designers seem to have done the impossible: The sleek, sophisticated Nano doesn't look flimsy or inexpensive. If it had been an upgraded scooter on four wheels, Tata still would have been applauded for making a family of four safer on Indian roads. The Nano, however, affords both safety and status. "The innovation wasn't in technology," Kant recalls. "It was in a mindset change." The Nano, he adds, has put an end to all discussions of having variants of scooters or quadricycles as passenger vehicles on India's roads.

Organizational innovation
Still, the story of the Nano is not confined to its impact on the auto industry. It's a tale that illuminates the India of today — an eager, ambitious nation with a combination of engineering talent, a desire for low costs and value, and the hunger of young managers looking to break from a hidebound corporate environment. Indeed, the team that worked on the Nano — on average aged between 25 and 30 — has helped to flatten Tata Motors' stodgy, multilayered management structure, which has resulted in an unexpected side-benefit Wagh calls "organizational innovation".

The factory in Singur, Bengal, is still being built, and machinery is being installed. Wagh now spends most of his time away from his Pune home, supervising the work at Singur leading up to the launch date in the fall. Tata Motors is determined to succeed in its mission, Ravi Kant says. "We are hungry for growth — and innovation is a by-product of that."